Climate Tech Overview

In 2015, U.S. Senator Jim Inhofe brought a snowball onto the Senate floor to disapprove the existence of climate change.

In the seven years that have passed, public consensus about climate changed has shifted considerably. Today, in Australia, 80% of citizens support the target of net zero emissions by 2050.

All around the world, citizens are demanding climate action from their leaders, businesses, and investors.

To reach net zero emissions by 2050, annual clean energy investment worldwide will need to more than tripled by 2030 to around $4 trillion.

Many have assumed that technological innovation will lower the cost of reaching this net-zero target.

Innovation is not inevitable.

History shows us that without the ingredients for innovation we can have centuries of stagnation, just look at Medieval Europe. However, innovation is likely if we continue to provide access to capital for innovators to create businesses that can change the world.

It begs the question, what is the role of venture capital (VC) in investing in this future?

VC has an abysmal track record in climate investing. VCs spent over $25 billion funding clean energy technology (cleantech) start-ups from 2006 to 2011 and lost over half their money.

Traditional VC as we know it will have fundamental limitations in investing in the future of climate. The average fund lifespan of 5–7 years is often too short to yield a return on technology that requires deep R&D. Moreover, funding by a VC is typically tied to reaching revenue milestones which is often not possible for deep tech climate projects. Finally, funds are seeking power law returns where each investment has the capacity to 10x the fund, many real real-world projects have lower return profiles.

So, what does all this mean?

It means that without changes to the traditional VC model, investors will keep choosing high margin climate software businesses over others. Infrastructure projects, chemical/material companies and hardware startups will all receive less funding, even though they are essential to reducing our real-world carbon emissions.

Expect traditional VCs to play a role in scaling certain types of climate tech businesses. Broadly speaking, these will be vertical software, marketplaces, managed services and climate API companies. For example, all these emerging climate industries such as the electric vehicle industry will give rise to numerous vertical software companies. There will be EV fleet management software, EV charging management software and even EV ride-sharing software. New climate products will give rise to new marketplaces such as carbon offsets and new types of energy marketplaces with distributed energy resources like rooftop solar.

While these types of software are undeniably important in improving the efficiency of these core industries, the world needs more core technology, made up of atoms not just bits.

We believe investing in climate requires both atoms and code to make environmental impact and returns.

For bits, there hardly needs to be an investment case. Software was the only subcategory that returned capital in the first clean-tech boom — with 3.4x multiple on invested capital, while every other category, from hardware to materials, lost money.

For atoms, we believe now is different to the early 2000s funding environment. There has been a quadruple increase in funding for deep tech ventures from 2016–2020. Many climate projects in the real world have gone on to accumulate real revenue and obtain unicorn valuations from Impossible Foods to Chargepoint. Successful exits, increased liquidity, longer fund lifecycles (e.g. Breakthrough Ventures) and a crowded SaaS market have all made real world investments more attractive. It’s worth highlighting the limited competition and innate defensibility in real world climate projects.

Broadly speaking there are five categories which are responsible for our global emissions’ — electricity (33%), transportation (20%), manufacturing (26%), buildings (5%) and agriculture (16%). There has been innovation at every level with a major increase in venture capital funding ranging from drones for solar panel and wind turbine inspections, lithium battery development all the way to AI crop analytics.

In our overview of the market, we did a deep dive into innovation aimed at reducing our electricity emissions, given it is the largest lever to pull. That being said there are numerous exciting developments from alternate meats changing our agricultural system to bioplastics reducing waste in manufacturing.

In Australia our energy system is the largest cause of our Co2 emissions at 33% and will undergo the most structural changes on our path to net-zero. The US & European markets largely mirrors Australia in this respect. There are a few key tailwinds we believe are radically creating new markets for entrepreneurs to solve problems within this space. These three macro trends are — the shift to renewables, the decentralisation of the energy grid and the rise of carbon credits.

Please note — we are interested in all climate technologies that reduce emissions in agriculture, transport, manufacturing and building.

The rise of Renewables

Currently, in Australia, renewables account for 32.5% of electricity generation. By 2030, this is projected to reach 69%. Australia is leading the world in rooftop solar adoption with a quarter of households having panels on their roofs. We believe this trend will create a number of opportunities. From a software perspective, we are excited about operating system businesses that act as an entire platform for the emerging renewable sector. For example, companies like Raptor Maps are providing an end-to-end management platform for solar panel inspection. There are also companies like uPowr creating software to automate solar quoting and implementation.

In atoms, Australia punches well above its weight. Companies like SunDrive have developed world first Solar panels that are 100X cheaper than traditional ones.

Australia can become an incubation hotbed for technology related to renewables and especially Solar.

Decentralised Energy Grid

Interlinked with the rise of renewables, is the decentralisation of our energy grid.

With the rise of distributed energy resources such as electric cars and solar panels, our energy grid is becoming increasingly decentralised. Our energy grids were not designed this way. They were built when electricity only flowed one way, from the distributor to the retailer to the consumer. Now the grids are becoming bidirectional as consumers send their own energy back to the grid.

Imagine a future where houses sell their own solar directly to one and another as they charge their electric cars and then buy surplus energy from the grid. It’s a future that is fast approaching and one that will invariably need software companies to optimise it.

There are a number of companies working on software to optimise this new decentralised grid from Gridcogniton to Gridsight. There are also companies like Span that offer consumers control over their energy consumption with the click of a button.

Carbon Credits

For the foreseeable future, fossil fuels will play a role in the energy mix. As such it is critical that the carbon offset market grow to reduce the harm of these emissions on the planet. It’s also forecast to be big business.

Demand for carbon credits could increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050. Some analysts forecast a carbon price of $120 a ton in 2050.

A host of services for carbon offsets have arisen from carbon offset marketplaces to carbon offset APIs. Companies such as Trace allow businesses to offset their carbon footprint by accessing verified carbon credits from carbon projects (typically replanting trees). Companies such as DroneSeed plant trees from the sky and then take a royalty on the carbon credit.

While the challenge to reach net-zero is a daunting one, we are unwaveringly optimistic after seeing the technology that entrepreneurs are building. If you are trying to decarbonise the planet, we would love to talk whether it be the energy grid, our food system or even our cars.

Innovation is not inevitable but with bold entrepreneurs and the right capital, it is.